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‘INFLATION DRIVERS’ PART 8 OF THE SERIES

‘INFLATION DRIVERS’ PART 8 OF THE SERIES

DRIVERS OF INFLATION #8: WAGE INFLATION     

WAGES ARE RISING QUICKLY IN THE DEVELOPING COUNTRIES

It is no secret that when commodities are less available and new resources become more scarce, their price is bid up.  We have been proponents of the view that world oil supplies will not last forever, and only at increasingly higher prices will new oil be found.  It seems that all the cheap oil has been found so the price mechanism has begun to ration the consumption of oil.  In other words, less oil is being consumed as prices rise.  This is often referred to as “demand destruction”.  However, you may remember from our earlier note that most consumers of oil have been sheltered from oil’s big price increases by subsidy programs in their home countries…policies that do not encouraged conservation.

Oil and some other commodities may not be available for use in the long run, so new sources of energy will be required to power the world.  Our concern is with what we see as the bigger problem; the infrastructure to power the world using other sources of energy does not exist.  The current world energy infrastructure is primarily focused on fossil fuels: coal, oil and natural gas; and their delivery through pipelines, their refining, their use in heating, transportation, electricity generation, and many other areas.

It will not be trivial to create a new global infrastructure for an alternative energy solution.  Most agree that the ‘new’ world will use a combination of nuclear, wind, solar, coal, battery, and other sources for electricity generation, heating, and transportation.  This new world will not exist until the infrastructure has been built (at great expense, and at great cost in natural resources) to allow for the transportation and processing of raw materials needed, the transportation and manufacturing of the new equipment and devices, and for the efficient delivery of the energy to the end users.  The time and resources required to build the infrastructure needed to harness new sources of power and to bring sufficient new supplies to the world will have inflationary effects.

Longer term, it appears that the rising cost of a unit of energy will continue to add to price inflation.


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